Don't forget volume.
Now that Labor Day's past, we'll get a better sense of how the stock market's reacting to interest-rate worries, unemployment figures, high housing starts, presidential politics and so on.
Weren't we seeing that in August? Sure, to some extent. But a lot of the big traders, fund managers and other influential players were reading thrillers on the beach, and on any given day the market only reflects the views of people who are actually participating.
Clearly, there were a lot of people on the sidelines: Volume on the New York Stock Exchange averaged about 333 million shares a day in August compared with nearly 400 million in July and 435 million in February.
We saw the Dow rise a nice 139 points in August, then drop to end the month at 5,594, only 21 points above where it started. Does that mean "the market" has turned negative? We may find out now that Wall Street is back at work.
An index such as the Dow is a measure of the health of the market. But the Dow, of course, represents only 30 stocks. And the Dow's closing level on any given day is merely a calculation based on the prices of each stock in the last trade of the day. The prices of individual stocks that you see in the morning paper also represent just the last of the hundreds or thousands of trades that took place throughout the day.
At any given moment, a stock's "current" price may be set by one buyer and one seller trading only 100 shares. Their views on value may be far different from those of other investors who may own hundreds of millions of shares.
At 9: 30 a.m. last Tuesday, for instance, shares in Nautica Enterprises Inc., the men's clothing maker, opened at a price of $26.25 with a trade of 500 shares. The price stayed between there and $26.50 for 22 subsequent trades. Then at 10: 01 a.m., there was a trade of 1,000 shares at $25.75. One minute later, 400 shares traded at $25.50, followed by another 100-share trade at $25.50 -- a transaction of just $2,550.
What had happened over 30 minutes to cause Nautica shares to fall $1 -- nearly 4 percent?
Nothing. At 10: 28, the price was up to $26. Five minutes later, the price dropped again, as 100 shares traded again at $25.50.
Each of these trades merely represents the value placed on the stock by the single buyer and single seller involved. If you had called your broker and offered $27 a share, someone would have sold it to you at that price, and that would be displayed as the latest price on quote machines all over the world.
This is why volume is important. The more shares trade, the more the share price reflects the market's true assessment of the value of the stock. If you were the only Nautica buyer Tuesday morning, your $27 offer would look like the market consensus. Since there were dozens of other trades, it was clear that $27 was outside the normal range. It's the same as when pollsters talk about margin for error: You get a more accurate result questioning 1,000 people than questioning 10.
This is one reason that prices of small stocks -- stocks of small companies -- bounce around so much. There are fewer shareholders and trading is "thin."
Pub Date: 9/09/96